The beginning of a new year is inevitably linked to articles giving you all the good advice you never asked for.
I am convinced that building a corporate venturing activity within a European utility for the past three years – arguably one of the hottest seats you can have in corporate venturing – gives me the right to do so, especially as many utilities had tried before with procyclical behaviour, starting around 1999 and closing down around 2004. Traders call this buy high, sell low.
When power and utilities group RWE decided at the beginning of 2008 to create a renewable technology-focused venture capital (VC) activity in its renewable arm, RWE Innogy, the joke was already clear – sell fast, the utilities are back.
The rest of the global financial story that started in autumn 2008 you all know well – a credit crunch and recession in many countries. And if you look at renewable indices, there is only one direction since then – south. But nobody expected that it would get as bad so fast.
So is it different this time? Will utilities have the stamina to grow their corporate venturing businesses? We will know the outcome in a couple of years, if this time the low valuations are taken as opportunity and not as threat.
In addition we have tried hard to learn from the past and I would like to share with you the dos and don’ts that might put the odds in favour of the new generation of utility corporate venturing units started in the past three years.
Do:
Set up a one-step decision process, where an investment committee genuinely interested in the VC transactions can take fast entry and exit decisions without having to ask for other departmental sign-offs.
l Invest with a clear exit focus. Corporate venturing has nothing to do with strategic (loss-making) investments, but with influence on corporate strategy through innovation.
l Align your investments with your own strengths in the team and the support you can get from the corporate sponsor.
l Keep your investment strategy unchanged over the fund’s lifetime and take early-stage or seed risk if you are a technology risk taker. After all this is what you were created for.
Don’t:
l Follow the existing corporate strategy, but shape the development of the corporate strategy through the achievements of your portfolio companies.
l Put energy into a complex and theoretical compensation scheme, that tries to value intangible strategic "value added", but incentivise the VC team only on the cash-on-cash return of the VC fund.
l Use special clauses to give your corporate sponsor an advantageous valuation when the exit is the corporate sponsor. The misalignment with the founders or entrepreneurs will have a strong adverse effect on the portfolio companies’ performances.
l Invest in super-hot topics, as the VC fund lifetime allows you to identify the right sectors and to help grow them to become hot topics.
Does this sound easy to fulfil? It may seem so, but it is not. The essence of the list is that corporate venturing is not about strategy or return, but strategic influenceand return.
The most important advice I have, of course, kept for the end. If you operate in a European utility environment, it helps a lot if the corporate venturing activity is originally built within the organisation that strongly supports it. Hiring external management know-how and engaging entrepreneurial spirit is a must.
Being an external corporate fund manager will make it extremely difficult to engage sustainably with the strategic and expert insight a utility can provide to start-ups. Either you are part of the family or you are not.